Della Ratta v. Della Ratta, 2006 WL 1235760, 31 Fla. L. Weekly D1325 (Fla. 4th DCA May 10, 2006) Dating back to 1884, Florida’s “family member” evidentiary presumption was at the heart of this recent piece of litigation revolving around a son’s lawsuit against his mother and step-father for ownership of a condo’ he lived in and fixed up based on an understanding that the property would be his. Intra-family disputes over vaguely defined economic arrangements are of course nothing new to the probate-litigation arena. What makes this case interesting is how a public-policy decision was made by the Florida Supreme Court in 1884 to “presume” the non-existence of economic obligations between family members living in the same home. Here’s how the Fourth DCA articulated the rule:

The supreme court articulated the “family member presumption” in Mills v. Joiner, 20 Fla. 479, 1884 WL 2067 (1884). There, a daughter sued her father for payment for housekeeping services she performed for him and her mother in their home for almost ten years. During this time, she lived in the home with her parents. The daughter alleged that her father agreed to pay for her services. Seven years later, the father reneged on the deal. At trial, the court charged the jury that the daughter could not recover unless she proved “‘a special contract or express promise that she was to be paid for her services.'” Id. at 492; Mills, 20 Fla. 479, 1884 WL 2067, at *4 (emphasis in original). The jury found for the father. It is a presumption of law that the father is not bound to pay a child, though of full age, for services while living with him at home and as one of the family; but this presumption may be overcome by proof of a special contract,[FN1] express promise, or an implied promise; and such implied promise or understanding may be inferred from the facts and circumstances shown in evidence. Id. at 492-93; Mills, 1884 WL 2067, at *4 (boldface supplied); see also Brown, 47 So.2d at 759, 763 (supreme court followed Mills in affirming the ruling that a daughter had not proved an express or implied contract that overcame the family member presumption, even though the daughter had rendered services to her mother for many years). The “family member presumption” described in Mills applies to personal services that a child performs for a parent while living “at home with [the parent] and as one of the family.” Id. at 492; Mills, 1884 WL 2067 at *4. [FN1.] In WPB, Ltd. v. Supran, 720 So.2d 1091, 1092 (Fla. 4th DCA 1998), we explained that a “special contract” is one with peculiar provisions or stipulations not found in the ordinary contract relating to the same subject matter. These provisions are such as, if omitted from the ordinary contract, the law will never supply. (citing 17 C.J.S. Contracts § 10 (1963)).”A special contract is always an express contract, ‘one whose provisions are expressed and not dependent on implication.’ ” Id. (citing Fitzpatrick v. Vermont State Treasurer, 144 Vt. 204, 475 A.2d 1074, 1077 (1984)).

The Sponsor’s Note to 2005->Ch0090->Section%20302#0090.302″>F.S. § 90.302 does a good job of putting this case in context by explaining the significance of evidentiary presumptions in general:

All presumptions that are not conclusive are rebuttable presumptions. For several decades, courts and legal scholars have wrangled over the purpose and function of these presumptions. The view espoused by Professor Thayer (Thayer, Preliminary Treatise on Evidence 313-352 (1898) ) and Wigmore (9 Wigmore, Evidence §§ 2485-2493 (3rd ed. 1940) ), accepted by most courts (see Morgan, Presumptions, 10 Rutgers L.Rev. 512, 516 (1956) ), and adopted by the American Law Institute’s Model Code of Evidence, is that a presumption is a preliminary assumption of fact that disappears from the case upon the introduction of evidence sufficient to sustain a finding of the nonexistence of the presumed fact. Professors Morgan and McCormick argue that a presumption should shift the burden of proof to the adverse party. Morgan, Some Problems of Proof 81 (1956); McCormick, Evidence § 317 (1945). They believe that presumptions are created for reasons of policy and argue that, if the policy underlying a presumption is of sufficient weight to require a finding of the presumed fact when there is no contrary evidence, it should be of sufficient weight to require a finding when the mind of the trier of fact is in equilibrium or if he does not believe the contrary evidence.

California attorney/mediator Charles Parselle just published an interesting article entitled “The Satisfactions Of Litigation,” available here on Mediate.com. Parselle reflects on why some parties are drawn, at least initially, to litigation over mediation. Especially for “first time” litigants (i.e., the vast majority of probate litigants), the lure of a trial can be very compelling, no matter how rational the arguments in favor of a mediated settlement agreement may be. Parselle summarizes the “satisfactions” offered by these contrasting methods of dispute resolution, all of which are especially applicable in the probate-litigation context:

In summary, litigation offers satisfactions that other forms of conflict resolution usually cannot match. These are: (1) vindication (2) empowerment (3) public hearing (4) legitimacy (5) justice. [B. Mayer, 2004]

Mediation does not offer, or is thought not to offer, these satisfactions. Successful mediators need to understand realize that the needs driving litigation are strongly felt, and seek to find some way to accommodate them. It is because the existing trial court system is so broken in many ways that disputants seek alternative means to satisfy their needs.

Yet mediation offers satisfactions that the litigation system cannot hope to offer. These are: (1) speed (2) choice of mediator (3) flexibility as to time and place (4) low cost (5) privacy and confidentiality (6) mutually acceptable results (7) control of outcome.

The reality may not turn out the way the process was imagined, but that imagining remains a powerful lure. For many litigants are first-time entrants who have never done it before; most of their education may have been in the illusory processes of movie or television courtroom drama. If they go through with a trial, they often find that the real thing is slow, technical, cumbersome, tedious, and turns out be emotionally disappointing.

This recent failure-to-diversify case out of Ohio underscores the trustee-liability issues I wrote about here regarding the recent appellate-court reversal of a $24 million judgment against Chase Manhattan in New York. In both cases the bank’s liability (or lack thereof) for losses arising from the decision to hold family stock in trust for decades (versus selling the family stock and diversifying the trust’s stock portfolio) hinged on express exculpatory language incorporated into the governing trust agreement itself. In Natl. City Bank v. Noble, 2005 WL 3315034, 2005-Ohio-6484 (Ohio App. 8 Dist. Dec 08, 2005), the issue before the court was whether the corporate trustee, National City Bank (“NCB”), was liable for the alleged 52% drop in the trust’s portfolio value. The trust in question was created in 1965 by Welker Smucker, son of the founder of the J.M. Smucker Company. Among the assets originally funding the trust were over 1,000 shares of J.M. Smucker Company common stock. The following exculpatory language was incorporated into the trust agreement:

“2. The Trustees are empowered to retain as an investment, without liability for depreciation in value, any part or all of any securities * * * from time to time hereafter acquired by the Trustees as a gift, devise or bequest from the Grantor or any other person, * * * even though such property be of a kind not ordinarily deemed suitable for trust investment and even though its retention may result in a large part or all of the trust property’s being invested in assets of the same character or securities of a single corporation. * * *. Without limitation upon the generality of the foregoing, the Trustees are expressly empowered to retain as an investment, without liability for depreciation in value, any and all securities issued by The J.M. Smucker Company, however and whenever acquired, irrespective of the proportion of the trust properly invested therein * * *. The Trustees are empowered to invest and reinvest any part or all of the trust property * * * in such securities * * * as they may select, irrespective of any limitation prescribed by law or custom upon the investments of trustees and even though the trust property may be entirely invested in common stocks or other equities * * *.” Trust Agreement, at Section E(2)-(3).

Based on this language, the court ruled that NCB could not be held liable for any alleged losses resulting from the failure to diversify the trust’s portfolio.

The language contained in Welker Smucker’s Trust Agreement is clear on its face that the trustees could retain investments without liability or depreciation. The trust went even one step further to insulate NCB as the corporate trustee, providing specifically that it had no duty to review or to make recommendations without the specific request of the individual trustee.

Lessons Learned: In an excellent essay published online here by BNA, the trustee-liability issues alluded to above are discussed in great detail. The introductory paragraphs to the linked-to essay sum up nicely the lessons to be learned from the Smucker and Kodak failure-to-diversify cases:

Investment diversification, always important for trustees, has in the last ten years become more important than ever. The Restatement (Third) of Trusts – Prudent Investor (“Restatement”) and the Uniform Prudent Investor Act have made clear that a trustee’s duty with respect to trust investments is to view those investments as a portfolio (rather than viewing each asset in isolation), and to diversify that portfolio. However, these innovations raise a question: do trustees now have an absolute duty to diversify trust investments? To spoil the ending of this tale, the answer, of course, is no. The Prudent Investor Act states explicitly that a trustee is to diversify investments unless there is a prudent reason not to. The factors that might convince a trustee not to diversify can include language in the trust agreement directing the trustee not to do so, the particular situations of beneficiaries or the tax cost of selling an asset that dominates the portfolio. Nevertheless, case law indicates that the duty to diversify may, in certain circumstances, be given greater weight than the trustee or her advisors might expect. In light of this judicial gloss, a trustee should assume, almost regardless of the circumstances, that she has the duty to diversify, and act cautiously when deciding not to do so. Further, lawyers drafting trust agreements should take extra care when drafting instruments for grantors who want trustees not to diversify.

My personal belief is that most probate disputes involve how an estate is administered, versus who gets what at the end of the day. I also believe that administration disputes are less a product of intra-family greed or any of the other “seven deadly sins,” but rather mostly the result of a family friend or trusted son or daughter being asked to do a job he or she is simply ill-equipped to do. If this often well-meaning person has the misfortune of hiring a lawyer who also isn’t up to the job: the fireworks are soon to follow.

That’s how I read this cautionary tale, where Monsignor Norman Bolduc, a Roman Catholic priest, is reported to have died owning a stock portfolio worth over $6.5 million. In his will, Bolduc left all his property to his parents. He named his best friend, another priest, the Rev. George Soberick, executor of his will. For complex reasons that remain unclear to me six months after Bolduc’s death the stock portfolio was worth only $500,000 (oops!). That’s when things got ugly. The following are excerpts from the linked-to story:

All of the accounts were finally liquidated about six months after Bolduc died. In the end, the value of the stock accounts had fallen to just under $500,000 from $6.5 million on the date of his death.

The greatest devaluation took place between early November 2000 and mid-December 2000, the period during which Soberick was petitioning for authority to act as executor.

Bolduc’s parents went to probate court arguing that Soberick did not act in time to prevent losses, given the state of the stock market. The probate court agreed with the parents and “surcharged” Soberick in the amount of $1,256,000, with interest of 5 percent calculated from Nov. 27, 2000, through April 15, 2005, the date of the court’s order.
A surcharge is the penalty for failure to exercise common prudence, common skill and common caution in the performance of the fiduciary’s duty and is imposed to compensate beneficiaries for loss caused by the fiduciary’s lack of care.

While this case is on appeal, it illustrates what can go wrong. Think twice about accepting an executor’s role; if you do, be sure to understand your responsibilities.

Lesson Learned:

Accepting the job of personal representative of an estate is an honor that carries very serious ethical and legal obligations along with it. If you make mistakes that result in significant financial losses – don’t expect the surviving family to simply shrug its shoulders and buy the “but I never meant any harm” defense.

As the Senate prepares for a May vote on estate tax repeal, increased budget deficits and a more educated public are spurring greater numbers to join a movement begun by some of America’s millionaires in 2001 to keep the federal estate tax. A new national poll shows that 57% prefer keeping the tax as is or reforming it. Only 23% favor repealing the tax. The number favoring preservation or reform rises to 68% when respondents learn more information about the estate tax, with 23% again favoring repeal.

For more facts and figures related to estate tax repeal, see here.

$24,076,937.31 Judgment v. Chase Manhattan Bank Reversed on Appeal

It is not unusual for the family wealth to be the product of one or two extremely successful investments or stock holdings. In those cases any testamentary trusts created by the decedent will obviously be funded with large blocks of one or two very valuable stock holdings. Not surprisingly the family will probably want the trustee to hold on to the large blocks of stock that made them all wealthy to begin with.

As Chase Manhattan Bank learned in this case, the family’s desire to remain concentrated in one or two stock holdings may conflict directly with the trustee’s duty to diversify the trust fund’s stock portfolio. In Florida, the duty to diversify is required under Florida’s prudent investor statute. See 2005->Ch0518->Section%2011#0518.11″>F.S. § 518.11(1)(c); see also 2005->Ch0737->Section%20302#0737.302″>F.S. § 737.302.

The duty to diversify may, however, be excused by the person creating the trust. It is exactly this type of direction that got Chase Manhattan off the hook for a $24+ million judgment! Here is the language focused on by the New York appellate court in In re Chase Manhattan Bank, 809 N.Y.S.2d 360 (N.Y.A.D. 4 Dept. Feb 03, 2006):

The trust was funded with a concentration of Kodak stock. Decedent’s will provided that “[i]t is my desire and hope that said stock will be held by my said Executors and by my said Trustee to be distributed to the ultimate beneficiaries under this Will, and neither my Executors nor my said Trustee shall dispose of such stock for the purpose of diversification of investment and neither they [n]or it shall be held liable for any diminution in the value of such stock.” Decedent’s will further provided that “[t]he foregoing *** shall not prevent my said Executors or my said Trustee from disposing of all or part of the stock of [Kodak] in case there shall be some compelling reason other than diversification of investment for doing so.”

Lesson Learned:

Deep-pocket trustees (read: corporate trustees) need to ensure proper language is included in the trusts they administer if the family’s desire is to hold on to one or two key stock holdings. The provision I include in my documents is the following:

I authorize the Trustee to retain the assets that it receives, including shares of stock or other interests in [XYZ STOCK], or its successors in interest, or any other company or entity carrying on or directly or indirectly controlling the whole or any part of its present business (collectively referred to as “XYZ STOCK”), for as long as the Trustee deems best, and to dispose of those assets when it deems advisable. I prefer that the Trustee not sell shares of stock or other interests in XYZ STOCK because I believe that the best interests of the beneficiaries will be served by retention of those interests in the Trust’s portfolio. I intentionally excuse the Trustee from the duty to diversify investments by the sale or other disposition of interests in XYZ STOCK that ordinarily would apply under the prudent investor rule, and I direct that the Trustee not be held liable for any loss or risk (even so-called “uncompensated risk”) incurred as a result of this failure to diversify. I realize, however, that circumstances may change, and that the Trustee may determine it to be advisable to sell some or all of the interests in XYZ STOCK, and nothing in this paragraph will be interpreted in any manner to limit the Trustee’s authority to do so.

The Wall Street Journal recently publishded Departing Shot: How to Disinherit Neatly, Wall St. J., May 6, 2006, at B4, by Kaja Whitehouse. The following are excerpts from this article:

Will contests are becoming more common because people have more to leave behind, says Philip Bouklas, an estate planning attorney in New York.

At least $41 trillion will be passed on before the middle of this century, according to a study by two Boston College economists. Last year, in fact, saw a record number of millionaire households: 8.9 million, compared with 4.9 in 1996, according to research group TNS Financial Services.

Consider using the following safeguards to protect your heirs from a long, costly court battle. Even if the jilted heir doesn’t win, a will contest or lawsuit can place an estate in limbo and deplete money from the rightful beneficiaries for legal fees.

Florida attorney Carly Howard recently published in article in the University of Miami’s International Law Journal that should be of interest to Florida practitioners working with foreign clients and their advisors. The following is an excerpt from the introduction to Trust Funds in Common Law and Civil Law Systems: A Comparative Analysis, 13 U. Miami Int’l & Comp. L. Rev. 343 (2006).

Due to globalization and the impact of international investing upon legal and financial systems, the trust and similar instruments have become enormously popular. Although the realm of trusts was fairly clear-cut only 30 years ago, there has been a “massification” of the trust throughout the world. Countries without traditional trust devices have been forced to adapt their laws to accommodate the growing use of trusts across the globe. Even original trust law jurisdictions have made frequent and drastic changes to trust law in response to its growing popularity.

This paper focuses on theories which validate and invalidate private trusts, as opposed to public or charitable trusts, and emphasizes the world’s attempts to harmonize differences in attitudes toward trusts. Topics include: 1) definitions and formalities of trusts; 2) purposes and elements of a trust; 3) histories of the common law trust and its civil law counterparts; 4) general principles of enforcement and recognition of trusts, particularly in light of the Hague Convention on the Law Applicable to Trusts and on their Recognition 1985. Although an understanding of the global state of trusts can be found by comparing the laws of particular countries, this paper surveys the general theories behind trust mechanisms and their application.

Listen to this post

The moment I read the U.S. Supreme Court’s Ruling in the Anna Nicole Smith case (a/k/a Marshall v. Marshall) I thought: “I guess I’ll be in federal court more often from now on.” Apparently I wasn’t the only one who thought this case would lead to more federal-court litigation involving trust and estates matters. Martha Neil in her article More Probate Suits Seen in Smith Ruling, ABA J. e-Report, May 5, 2006, reports that the case is expected “to open federal courtroom doors to a deluge of new estate-related litigation.” Here is an excerpt from her article:

Meanwhile, even those on the other side expect the Supreme Court decision in Smith’s case to open federal courtroom doors to a deluge of new estate-related litigation. “I think it’s going to be read primarily by litigators and it’s going to create another new litigation opportunity,” says James R. Wade, a Denver lawyer and former probate judge who filed an amicus brief on behalf of the National College of Probate Judges. “I think that the litigators are going to see opportunities which they hadn’t even thought of before of bringing probate cases in federal court.”

Earlier today (Monday, May 1, 2006) the AP reported here that Anna Nicole Smith scored a big win before the U.S. Supreme Court, which by a unanimous vote reversed the Ninth Circuit Court of Appeals in Ms. Smith’s favor (for more background on this case, see my prior blog post here). Here is an excerpt from today’s AP story:

WASHINGTON – The Supreme Court ruled Monday that one-time stripper and Playboy Playmate Anna Nicole Smith could pursue part of her late husband’s oil fortune. Justices gave new legal life to Smith’s bid to collect millions of dollars from the estate of J. Howard Marshall II. Her late husband’s estate has been estimated at as much as $1.6 billion. Smith has been embroiled in a long running cross-country court fight with Marshall’s youngest son, E. Pierce Marshall. The court’s decision, which was unanimous, means that it will not end anytime soon.

The legal issues at play in this case, Marshall v. Marshall, are summed up nicely in the following excerpts from the Supreme Court’s opinion:

In Cohens v. Virginia, Chief Justice Marshall famously cautioned: “It is most true that this Court will not take jurisdiction if it should not: but it is equally true, that it must take jurisdiction, if it should . . . . We have no more right to decline the exercise of jurisdiction which is given,than to usurp that which is not given.” 6 Wheat. 264, 404 (1821). Among longstanding limitations on federal jurisdiction otherwise properly exercised are the so-called “domestic relations” and “probate” exceptions. Neither is compelled by the text of the Constitution or federal statute. Both are judicially created doctrines stemming in large measure from misty understandings of English legal history. * * * In the years following Marshall’s 1821 pronouncement, courts have sometimes lost sight of his admonition and have rendered decisions expansively interpreting the two exceptions. In Ankenbrandt v. Richards, 504 U. S. 689 (1992), this Court reined in the “domestic relations exception.” Earlier, in Markham v. Allen, 326 U. S. 490 (1946), the Court endeavored similarly to curtail the “probate exception.” Nevertheless, the Ninth Circuit in the instant case read the probate exception broadly to exclude from the federal courts’ adjudicatory authority “not only direct challenges to a will or trust, but also questions which would ordinarily be decided by a probate court in determining the validity of the decedent’s estate planning instrument.” * * * The Court of Appeals further held that a State’s vesting of exclusive jurisdiction over probate matters in a special court strips federal courts of jurisdiction to entertain any “probate related matter,”including claims respecting “tax liability, debt, gift, [or] tort.” Id., at 1136. We hold that the Ninth Circuit had no warrant from Congress, or from decisions of this Court, for its sweeping extension of the probate exception. (Emphasis added.)

Source: Wills, Trusts & Estates Prof Blog